Liquidity

Liquidity is the characteristic of an asset to get converted to cash. The faster an asset can be converted to cash, the more liquid it is.

Arrangement of Assets

The highest liquid asset is placed first (at the top) and the least liquid asset is placed last.

Cash is considered to be the highest liquid asset. We do not need any time to convert cash to cash.

Goodwill is considered to be the least liquid asset. It is attached to the organisation and can be realised only when the organisation is dissolved.

Arrangement of Liabilities

Every liability is supported to the extent of its value, by one or more assets. Assuming all liabilities are cleared by paying out, we need cash to clear the liabilities. Since short term liabilities are to be cleared at short notice, we use assets that can be speedily converted to cash (more liquid assets) to clear the short term liabilities.

Short term liabilities like creditors, bank overdraft are matched with assets which are more liquid, while long term liabilities are matched with lesser liquid assets.

Since assets with higher liquidity are placed at the top (first), under this method, the liabilities to be paid out at the earliest are placed first (so that they match the higher liquid assets) and the liabilities to be paid out last are placed last.

Capital is the liability that is paid out last. Paying out capital amounts to dissolving the organisation. It has to be paid out only after every other liability is paid out.

Bank Overdraft is the liability which has to be paid out at the earliest. It gets adjusted with every transaction carried on that involves the organisation's bank account.

Order of Permanence

Under this method, the assets are arranged in the decreasing order of permanence.

Permanence

The affinity of an asset to stay with the organisation or the longevity of the life of an asset with the organisation. The longer an asset stays with an organisation, the more permanence it has.

Arrangement of Assets

The asset with the highest permanence is placed first (at the top) and the the asset with least permanence is placed last.

Goodwill is considered to be the asset with the highest permanence. It moves out of the organisation only when the organisation is dissolved.

Cash is considered to be the asset with the least permanence. It keeps moving in and out regularly.

Permanence can be understood as the inverse of liquidity. Though it is not a requirement that a less liquid asset should have greater permanence, this idea holds in most cases. Thus, the Order of permanence is considered to be the reverse of the Order of Liquidity.

Arrangement of Liabilities

Every liability is supported to the extent of its value, by one or more assets. Assuming all liabilities are cleared by paying out, we need cash to clear the liabilities. To clear short term liabilities we bank on assets that can be speedily converted to cash. Since short term liabilities are to be cleared at short notice, we use assets with a short life span, which are generally the ones that can be speedily converted to cash (more liquid assets) to clear the short term liabilities.

Short term liabilities like creditors, bank overdraft are matched with assets with a lesser permanence (i.e. assets which are more liquid), while long term liabilities are matched to assets with a higher permanence (i.e. assets which are less liquid).

Since assets with higher permanence are placed at the top (first), under this method, the liabilities with higher permanence are placed first (so that they match the assets with higher permanence) and the liabilities with lesser permanence are placed last.

Capital is considered to be the liability with highest permanence. Paying out capital amounts to dissolving the organisation. It has to be paid out only after every other liability is paid out.

Bank Overdraft is considered to be the liability with the least permanence. It has to be paid at the earliest. It gets transformed/adjusted with every transaction carried on that involves the organisation's bank account.